German High Court OKs Permanent Bailout Fund with Reservations

Germany and Europe can both breathe a sigh of relief on Wednesday: The Federal Constitutional Court has rejected a petition to stop the ratification of the permanent euro rescue fund, the European Stability Mechanism. The decision clears the way for the ESM to go into effect.

DPA

Germany's Federal Constitutional Court has cleared the way for the country to ratify the European Stability Mechanism, the permanent euro bailout fund.

In a historically significant signal for the euro rescue, the German Federal Constitutional Court on Wednesday ruled there are no grounds to stop the country from ratifying the European Stability Mechanism, the permanent euro bailout fund, and the fiscal pact aimed at bringing economic governance to countries in the euro zone. The decision bolstered stock markets in Europe and around the world and also strengthened the euro. However, the justices at the Karslruhe-based court also expressed some reservations.

The court ordered that ratification can only be completed if it is ensured under international law that Germany's current maximum liability of 190 billion ($245 billion) can only be increased with the approval of the German representative in the ESM board, court President Andreas Vosskuhle said. "(No) provision of this treaty may be interpreted in a way that establishes higher payment obligations for the Federal Republic of Germany without the agreement of the German representative," the court states.

This also means that Germany's federal parliament, the Bundestag, must play the leading role in important decisions. Under a German law accompanying the ratification of the ESM treaty, the German parliament must first vote on the positions taken by the German representative in the ESM board before they can act on them. However, it is still unclear at this point whether decisions will require a vote of the full parliament or the significantly smaller budget committee.

In another significant condition, the court ruled that Germany must ensure that the treaty is implemented in a way that ensures that representatives of the Bundestag, and the Bundesrat, the upper legislative chamber that represents the federal states, are comprehensively informed of the bailout fund's activities despite the professional secrecy that ESM employees are required to adhere to.

Vosskuhle also noted that the decision on the permanent rescue fund is provisional and that full proceedings would follow.

Germany is the only euro-zone member state that has not yet ratified the treaty establishing the ESM. Without the participation of the EU's largest member state, the bailout fund has not been able to begin its work yet.

'Good for Germany, Good for Europe'

German Chancellor Angela Merkel praised the ruling. "This is a good day for Germany, a good day for Europe," she said during a special session of the German parliament. "We haven't yet overcome the crisis, but we have achieved our first steps." She said Germany had sent a "strong message to Europe and beyond." The court has cleared the way for the ESM and the fiscal pact while at the same time strengthening the rights of parliament. This, she said, would provide certainty for everyone -- not only members of the Bundestag but also taxpayers.

Foreign Minister Guido Westerwelle of the business-friendly Free Democratic Party (FDP), which is the junior coalition partner in Merkel's government, also greeted the ruling. "It was a smart decision reflecting the pro-European spirit of our constitution," he said, adding that the conditions imposed by the court had been necessary and that Germany could not be allowed to become overburdened. "The Federal Constitutional Court has affirmed the policies of the federal government and declared them to be constitutional. That's good for Germany and good for Europe."

The group Mehr Demokratie ("More Democracy"), together with 37,000 German citizens, had sued at the country's highest court to halt the ESM's ratification. The group alleged that Germany was entering into "unlimited and irreversible liability risks." Peter Gauweiler, a politician with the conservative Christian Social Union who is a prominent critic of the German government's euro rescue policies, and the Left Party had claimed that accepting the new liabilities would be irresponsible.

There are also critical voices within Merkel's conservative Christian Democratic Union party, which has largely stood behind her policies in rescuing the euro, but is also home to some of her greatest adversaries in the crisis. Wolfgang Bosbach, a notorious critic of the euro rescue, expressed skepticism about the court's ruling. Despite the conditions imposed by the court, he said, Germany still carried enormous liabilities. "I have mixed feelings about the ruling," he said. On the one hand, it has strengthened parliament's hand in Berlin. But he also warned that it only created the appearance that the upper ceiling on Germany's liability would be limited to 190 billion. He argued that if the European Central Bank purchases government bonds in an unlimited manner, as the bank has said it may do, that would also increase Germany's potential liability.

German President Free To Sign Treaty

Following Wednesday's ruling, German President Joachim Gauck is now free to sign the ESM treaty, which was already approved by Germany's parliament, the Bundestag, in June. The ESM can only go into effect with his signature.

The permanent euro bailout fund will operate in parallel with its predecessor, the European Financial Stability Facility (EFSF), for a period, completely replacing it by mid-2013. The ESM will be equipped with 700 billion in capital but will only be able to lend a maximum of 500 billion.

In accordance with its share capital in the European Central Bank (ECB), Germany is providing guarantees for 27 percent of the ESM's funds. Germany is required to provide 22 billion in cash to the fund as well as guarantees totaling close to 170 billion. But critics fear that Germany will have to provide far more cash and guarantees in the end.

Despite firm words of warning in the past, the court has never ruled against the ratification of a major EU treaty and most politicians in Berlin, including Chancellor Angela Merkel, expected that the constitutional guardian in Karlsruhe would give its blessing to the ESM.

Stock markets across Europe showed gains following the Karlsruhe ruling. Eurostoxx, an index of blue chip European companies, rose briefly by 1.2 percent -- to close to 2,580 points. Spain's leading index, Ibex, also rose for a time by over 1 percent exceeding 8,000 points. Meanwhile, Italy's FSTE rose by more than 1 percent, bringing it to a total of almost 200 points.

The euro also rose on the news to $1.2906, its highest level since mid-May.